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With New JOBS Act Rule, a New Era of Investment Banking?


Enactment of the general solicitation ruling can't begin soon enough for smaller investment firms that have been battered by anemic capital markets and a quiet M&A scene.

The world of hedge funds and private equity shops just got a tad less rarified: A hotly anticipated facet of the JOBS Act allowing firms to troll for investments from the general public went into effect yesterday.

The so-called "general solicitation" ruling is another step in bringing Main Street a bit closer to Wall Street. Not unlike the proliferation of online, discount brokerage houses and mutual funds of generations past, Joe Sixpack (a rich version of him, at the very least) can now access some of the most sophisticated investment tools that were once available only to the pool of accredited investors long known to private firms.

The enactment of yesterday's JOBS Act ruling means much more than a hedge fund being able to take out an old-fashioned magazine advertisement for the first time -- although now it theoretically could do so if it wanted to. (The alternative investment arms of financial services firms like Goldman Sachs (NYSE:GS) and JPMorgan (NYSE:JPM) can now advertise to the public, too.) More importantly, the ruling means that investment firms are looking to go digital by using the World Wide Web to crowdfund new companies, inventions, and entrepreneurs. In much the same way that eBay (NASDAQ:EBAY) revolutionized the auction process by creating a global marketplace for items that would otherwise be relegated to a rummage sale, crowdfunding is an Internet-based pooling of assets or activities that utilizes the Web's global reach.

Private investment firms are hoping that crowdfunding vast numbers of investments from people theretofore unknown to them will help establish another major source for raising capital. The ruling's enactment can't begin soon enough for smaller investment firms that have battered by anemic capital markets and a quiet M&A scene since the onset of the global economic crisis exactly five years ago.

The ruling will also encourage new investment firms to spring up that are tailored to raising funds online from the general public. Other firms are positioning themselves as conduits between private investment firms and this new pool of investors. For instance, is a new online platform launching early next year that will curate a set of private funds for prospective investors, according to the firm's CEO, James Waldinger. "Today's ruling is a great move on the part of the SEC," Waldinger says. "It helps usher in a new era of transparency and open communications around fund-raising."

Artivest aims to connect the right investors with a select group of private investment firms. The idea behind Artivest, according to Waldinger, is that it serves as a portal through which private funds can communicate their goals and minimum investment thresholds with the public – something these firms have not been allowed to do until now. If anything, says Waldinger, this new era of general solicitation will make for even closer scrutiny of potential investors because until recently, the limited pool of accredited investors was generally well known to the private firms. "There's now an even higher burden [to ensure] that the people you choose to invest with you are accredited investors," he says.

Another facet of the JOBS Act that will soon take effect addresses equity crowdfunding – the ability for people to invest directly in start-up companies. That enactment will remove the accreditation requirement that's currently a part of today's general solicitation ruling. Online firms like Rock the Post essentially act as clearinghouses for accredited investors as well as a portals for equity crowdfunding. Rock the Post builds upon the premise of Kickstarter, which has tended to focus on the crowdfunding of creative projects like film documentaries.

Like any shift in government regulation, there's also a new market created for lawyers to interpret the mechanics of the new rules. The question facing some accredited investors is whether opening up the capital-raising process to the masses will chip away at the array of arbitrage opportunities that were once as good as assured by the niche, alternative investing methods of hedge funds.

Not all private firms are confident the new ruling will result in a flood of new funds to the capital-raising process. "I'm doubtful that [the general solicitation ruling] is going to open up the spigots," says Jacob Yahiayan, managing member of family office Continental Advisory Services LLC. "Relaxing federal-level laws doesn't really add a lot of value. Today, money is still highly biased towards certain matrices and the really big investors are still few and far between."
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